The bond market is ready

On Tuesday, the yield on the 2-year Treasury note spiked to
a four-year high of 0.815%. Other short-term bond yields,
including the 1-year and 6-month bills, climbed to
multi-year highs. Yields rise as bond prices fall.

Yields on short-term treasuries are the most sensitive to
interest rates and the Fed's outlook. On Thursday, the Fed will
announce its latest monetary policy decision, which could see the
benchmark Fed funds rate rise from near zero for the first time
in nine years.

In a note Friday, Morgan Stanley's interest rate strategists
forecast a move higher to 0.73% for the 2-year yield in a
scenario where the Fed signals a forthcoming rate hike in October
or December without moving this month.

If the Fed does hike on Thursday, unlike markets expect, the
strategists see the yield rising to 0.90%.

And so the recent move in the 2-year does not imply that traders
expect the Fed to lift rates this Thursday. It does, however,
indicate that the bond market is positioning for higher rates.

Priya Misra, head of global rates strategy at TD Securities, told
Business Insider (emphasis added), "The 2y at
the highest yield in 4 years is a sense that whether the
Fed goes or not later this week, we are the closest we have ever
been to the start of the hiking cycle. Investors may be
buying protection in case of a hike or a no hike but hawkish
message from the Fed."Business Insider/Andy Kiersz